Managing Geopolitical Risk

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Memo to the Prime Minister

Prime Minister

Congratulations on your election. You have now constructed your government. You may be forgiven for thinking that your predecessor and the British people have dealt you something of a weak hand on the key issue of your premiership, Britain’s withdrawal from the EU. However, you should be of good heart and approach the negotiations constructively and imaginatively. Do not be distracted by offers of free trade agreement from around the world. Such agreements are important, but your priority must be to shape Britain’s future relationship with Europe. Britain cannot divorce itself from Europe.

Europe is not in a good way. That is both a risk and an opportunity for Britain. The unified European Union envisaged by the Lisbon Treaty is a fiction. In fact there are three very different parts of the European Union: a North-western group of Eurosceptic countries, of which Britain is one, outside the Eurozone; an eastern group of former Warsaw Pact countries, also outside the Eurozone; and the Eurozone itself. This fragmentation of the EU puts pressure on its structures and institutions, which are designed for an ever more integrated single union. Officially it is thought that this does not matter as all EU members are obliged to adopt the Euro as they meet the economic and monetary criteria, apart from Denmark and Britain, who will ultimately see the error of their ways. Thus Europe will be reunified within the Eurozone. However, it is now clear that this will not happen, at least in the foreseeable future, and that Europe will continue to be divided into the Eurozone and those that cannot, or will not, adopt the Euro.

There are instability and tensions within the Eurozone itself, where the Euro crisis has been postponed rather than resolved. Preserving the Euro will require full banking, economic and fiscal union. Germany has made clear that it can accept this only if accompanied by political union. It seems unlikely that France will ever accept political union. It is certainly inconceivable in the current political climate. The Eurozone will continue to integrate at the margins, with the ECB gaining evermore power in the banking sector, and will be significantly more integrated than the rest of the Union. But with out further radical integration, it will continue to stumble from crisis to crisis.

The divide between the Eurozone and non-euro members renders the EU’s constitutional and institutional structures unstable and unsustainable (including the Treaty of Lisbon). The European Commission’s role in the Eurozone is much diminished, where the key institutions are the ECB and the Eurogroup. The Commission’s problems are compounded by its poor relations with the non-euro countries. Commission President Juncker clings onto the Lisbon Treaty as a lifeline while the Commission’s authority and purpose collapses around him. More seriously, there is no mechanism for mediating conflict between the Eurozone and the non-euro members of the EU. Last year the were currency wars within the EU between the ECB and the central banks of Sweden and Denmark, who still have to maintain their key interest rates negative to be able to trade with the Eurozone. Again this would not matter if the two speed Europe were a temporary phenomena. It is not, and the current arrangements are unsustainable.

Europe’s problems are compounded by the volatile international environment. The migration crisis has eased, in part because of the deal brokered by Merkel with Turkey. This may not last. Post-coup an ever more authoritarian Erdogan seems to be moving away from Europe. Harsh repression and the possible reintroduction of the death penalty will make it difficult to keep EU-Turkish relations on an even keel. Turkish refugees from Erdogan’s clamp down may join the other migrants seeking to enter Europe. Meanwhile signs of a rapprochement between Erdogan and Putin may call into question Turkey’s position in NATO. Russia remains a threat in Europe’s eastern frontier. The Ukraine remains unresolved, and there are many more pressure points which Putin can use. Europe remains without a credible common foreign policy, and talk of an enhanced defence policy is meaningless without the resources to implement it. Without the UK, France remains the only significant military power in Europe. But, between deployments in Africa and domestic counterterrorist duties, French forces are overcommitted. Brexit leave Europe security even more dependent on NATO and the US.

Britain should not rejoice over Europe’s problems. Schadenfreude is misplaced. As Churchill said before WWI, ‘”Europe is where the weather comes from”. But your government must decide what kind of Europe is in Britain’s interests, and how Britain should relate to it. This should be based on Europe’s reality, not the caricatures used by both sides in the Brexit debate. A failed, chaotic Europe is not in Britain’s interest, but neither is a successful federal superstate encompassing all members of the EU. Fortunately neither is likely. Britain’s aim should be a stable quasi federal Eurozone surrounded by a group of non-euro countries in a looser more confederal type relationship. Europe’s formal institutions and structures need to reflect this as a permanent state of affairs. This is achievable and would allow Britain to continue to play the kind of leading role in Europe that would have been familiar to Castlereagh.

This analysis has implications for the way your government approaches the Brexit negotiations. You should avoid getting bogged down in the details of the Article 50 negotiations and instead take a broad approach based on Europe’s geopolitical and economic realities. Key elements of this strategy include:

Do not be too quick to activate Article 50. Time is on your side. The tensions and conflicts between the Euro and non-euro members (and indeed within the Eurozone itself) will grow over time. Referenda in Hungary and Italy and elections in the Netherlands, Germany and France will impact the geopolitical environment. Irritation with Britain will dissipate over time, as other crisis make clear the need for a sensible agreement.

Do not focus on negotiations with the Commission. They are your enemy. Their power and influence is diminishing. They take Brexit as a personal affront. Once you activate Article 50 you have to negotiate with them (another reason to defer activating it). Focus instead on the broader conversations with other member states. They will frame the negotiating strategy of the Commission.

Merkel is a potential ally. She does not want Britain to leave the EU. She fears that Britain’s departure will exacerbate tensions between Paris and Berlin. She is also uncomfortable with Germany’s role as the leader in Europe. She will be happy to slow things down in the hope of a fix. You may have to disappoint her in the end, meanwhile use her patience and caution to your advantage (but do not taken her for granted).

Focus on the non-Euro members of the EU, especially in Eastern Europe. Their concerns focus on security against Russia, migration, relations with the Eurozone and an over mighty Commission (sound familiar?). Talk about their concerns and where possible offer British support. In particular offer military support.Britain is uniquely well-placed in the EU to do so. As successive British prime ministers have recognised, Britain’s defensive line does not lie in the British channel.

In conversations with other countries focus on free trade and market friendly policies. Many countries value Britain’s contributions in these areas, and fear what will happen when Britain leaves. Be generous over EU citizens working in the Britain. The aim is that Britain escape the political control of Brussels. This must take priority. A Norwegian type solution is not acceptable.

Above all do not talk about Britain’s problems. No one is interested. Prior to activating Article 50, talk about Europe’s problems. Do not be shy about portraying the reality of Europe’s two-speed structure and its implications, or the internal and external challenges that Europe faces. But do so constructively in a way that makes clear that Britain wants to be part of the solution.

If pursued with energy and diplomatic skill, this strategy offers the opportunity of converting the departure of an isolated Britain from Europe into the restructuring of the EU itself into a geopolitical arrangement with which we, and others, can feel more comfortable.